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Introduction to Risk Management and Derivatives

In: Shipping Derivatives and Risk Management

Author

Listed:
  • Amir H. Alizadeh

    (Cass Business School, City University)

  • Nikos K. Nomikos

    (Cass Business School, City University)

Abstract

Few will argue that these are not interesting times for the shipping industry. Freight rates have risen to unprecedented levels and have increased by almost 300 per cent over the period from 2003 to mid-2008. This increase in freight rates was followed by a corresponding drop of 95 per cent over the last quarter of 2008. A number of factors have contributed to this high volatility in the market, which also seems to have changed the way the industry views and manages its risks. In addition to freight-rate volatility, we have also seen the emergence, maturing and corresponding growth in the derivatives market for freight. Traditionally, this was a market where players in the physical freight market could hedge their risks, although this is now changing rapidly with the increasing participation of investment banks, hedge funds and other traders that may not be involved in the underlying physical market. Overall, this has resulted in the commoditisation of the freight market. Nowadays, freight rates can be bought and sold like any other commodity, despite the fact that freight rates essentially represent the cost of providing the service of seaborne transportation and hence are not classified as a tangible commodity.

Suggested Citation

  • Amir H. Alizadeh & Nikos K. Nomikos, 2009. "Introduction to Risk Management and Derivatives," Palgrave Macmillan Books, in: Shipping Derivatives and Risk Management, chapter 1, pages 1-23, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-23580-9_1
    DOI: 10.1057/9780230235809_1
    as

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